Top 4 Features of a Collateral-Free Business Loan

6 min read • Published 28 February 2023
Written by Animesh Gupta

When you are starting a business or even if it’s running, you will need additional funding to keep the operations going on smoothly. For start-ups, angel investors and crowdfunding are popular ways of raising funds but they are not easy to achieve. Instead, you can opt for a collateral-free business loan. Get more details about the features and benefits of this loan. 

Collateral-Free Business Loan: What Is it? 

Collateral is the security a borrower keeps while taking out a loan. Unsecured loans do not need one. 

Collateral-free business loans do not require any hassle of lengthy documentation or complicated approval procedure. The process from application to approval is pretty quick and comes with flexible tenure. 

As per CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises), small and micro businesses are eligible for a collateral-free loan of up to ₹1 crore. There are also many banks, NBFCs and micro-financers offering unsecured business loans. 

What are the Features of a Collateral-Free Business Loan? 

Knowing the features and benefits of collateral-free business loans will help you make an informed decision. Hence, go through the following pointers: 

  • High Loan Amount 

Depending on the borrower, you can borrow a hefty amount that can range between Rs.50 lakh and Rs.1 crore. It will however, vary from lender to lender. 

  • Flexible Repayment Tenure 

Collateral-free loans usually come with a flexible repayment tenure that can fall anywhere between 1 year and 5 years. However, some lenders also offer 8 years repayment tenure. 

  • No Security/ Collateral 

This is the best part of a collateral-free loan – you do not need to put a valuable asset as security. Also, there is no need to go through a lengthy approval process involving bulky paperwork regarding collateral or security. 

  • Availability of Pre-Approved Offers

Some borrowers get pre-approved offers such as a top-up loan. This availability depends on the lender as well as the borrower. Your credit and repayment history plays a large role in determining such an offer. 

What are the Eligibility Criteria for Availing a Collateral-Free Business Loan? 

Knowing the eligibility criteria beforehand can help you know the chances of approval for a collateral-free business loan: 

  • You should be an Indian citizen. 
  • You must be within the age brackets of 26 and 66 years. 
  • The business must be a minimum of 3 years old.
  • Books of accounts of the business are being audited by a Chartered Accountant 
  • You need to submit proof of business ownership.

These eligibility criteria might change depending on the lender. 

What are the Documents Required for a Collateral-Free Business Loan? 

You should keep the following documents ready and handy for a seamless application procedure: 

  • Updated bank account statement of the previous year. 
  • Preceding year’s Income Tax Returns.
  • PAN Card 
  • Passport/ Driving License/ Aadhaar Card 
  • Any other lender-specific documents required 

How to Apply for a Collateral-Free Business Loan? 

Here is a step-wise guide for a seamless collateral-free business loan application process: 

Step 1: Do your thorough research on lenders. Compare various aspects and find out the one most suitable as per your requirements. 

Step 2: Check your eligibility for an unsecured business loan. You can go through the lender’s eligibility criteria. 

Step 3: Find out the most appropriate loan option for you. You can do so by using an online EMI calculator. 

Step 4: Keep all the necessary documents handy for a hassle-free application process. 

Step 5: Carefully fill up and submit the application form with your basic and personal details. You should remember that even a minor mistake can lead to rejection of your application. 

After completing the application process, you need to wait for a call from the financial institution’s representative to assist you with further steps. 

How to Increase Chances of Approval for an Unsecured Business Loan? 

Following are some of the tips on how to increase the chances of approval for an unsecured/ collateral-free business loan: 

  • Make sure you have a solid business plan. 
  • Pay attention to your credit history and score. If you need to improve your credit score, work towards that. 
  • Go through the reviews of your company’s online presence. 
  • Share with the lender about your plans on what will you do with the fund. 
  • Make sure you verify and choose a trusted lender. 

About CGTMSE Collateral-Free Loan

CGTMSE is a scheme launched by the Government of India in collaboration with SIDBI (Small Industries Development Bank of India). This scheme aims to provide stimulation in the MSE sector of this country. 

You can avail a collateral-free business loan of up to ₹1 crore under this scheme. To apply for a loan amount higher than ₹1 crore you need to provide collateral. The maximum loan amount can be ₹2 crore as per MSMED Act, 2006. However, educational and training institutions, SHGs (Self Help Groups), and retail trades are not eligible to apply for this loan. 

What are the Advantages of CGTMSE Collateral-Free Loan? 

There are multiple advantages of CGTMSE Collateral-Free Loan. They are- 

  • You can avail of this loan at subsidised rates of interest. 
  • Repayment tenure can be a maximum of 5 years. 
  • The application is quick and hassle-free.
  • You can also apply for this loan for product development. 
  • Bill discounting and a Letter of Credit are available for 180 days. 
  • Private companies having SME/ SSI registration are eligible to apply for this loan. 
  • Partnership Firms, Sole Proprietorships, and Public Limited Companies are also eligible for this loan.  

Final Word 

Collateral-free business loans can be great funding options especially for small businesses and start-ups that do not have enough assets to pledge as security. However, such loans can come with higher interest. Conduct thorough research and take a suitable decision.

FAQs

Q1. Which banks provide CGTMSE collateral-free loans? 

Ans. You can apply for a CGTMSE collateral-free loan at all public sector banks such as SBI, UCO Bank, Bank of Baroda, Allahabad Bank, IDBI Bank, Bank of India, etc. 

Some private sector banks also offer this loan such as Axis Bank, ICICI Bank, Kotak Mahindra Bank, HDFC Bank, ING Vysya Bank, and IndusInd Bank. 

Q2. What is the maximum and minimum repayment tenure for CGTMSE loans? 

Ans. You can pay off the debt within a minimum of 12 months and a maximum of 5 years. 

Q3. Will I find it difficult to get a collateral-free business loan? Ans. It is not difficult to get a collateral-free business loan with various government schemes available. But your business plan and credit score play an important role in approval as there is no collateral involved.

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Animesh Gupta

Credit Principal
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 5+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.

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